A confidential bill circulating among Senate Democrats proposes sweeping new oversight of DeFi, expanding Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) duties to DeFi interfaces, validators, and even node operators.
According to reports, the leaked bill was intended as a counterweight to Democrats’ House-backed market structure bill. However, internal reactions have reportedly stalled broader discussions within the Senate Banking Committee.
According to the leaked framework, all DeFi applications that enable financial transactions must implement front-end KYC controls, potentially including browser-based wallets and liquidity interfaces.
The leaked language also places new responsibility on oracle operators, potentially exposing them to enforcement if price feeds are tied to “sanctioned” protocols.
The Treasury Department would also be given the authority to create a “restricted list” of protocols deemed too risky for US users.
Senator Ruben Gallego claimed that the Democrats’ bill represents the party’s attempt to build a bipartisan consensus on the structure of the crypto market.
According to him:
“Democrats are ready to get to work… They asked for paper and content, and we delivered.”
Market impact
The move has sparked a new round of partisan tensions in Washington, with Republican lawmakers and crypto industry figures warning it could cripple innovation and push U.S. Bitcoin and Ethereum liquidity abroad.
To understand the risk, one must consider the current landscape in which US-based platforms account for only a small portion of global volume.
According to data from Newhedge, US crypto trading platforms already account for less than 10% of global trading volume, while the top eight (mainly offshore) platforms account for around 90% of global market depth.
These figures show that liquidity is already being attracted to platforms with fewer regulatory restrictions. Forced compliance with the Senate’s proposal at the protocol level could accelerate that flight.
If US users are forced to communicate only through KYC-verified front ends, or if the Treasury Department can block access to specific protocols, traders seeking anonymity, flexibility, and less friction may migrate to bridges or foreign exchanges where these restrictions are looser or unenforced.
Over time, that shift would entrench offshore platforms as liquidity hubs, deepen the dominance of already large non-US exchanges and fragment trading across jurisdictions.
At the same time, US liquidity pools would shrink due to fewer active counterparties, wider spreads and reduced depth. That fragmentation would hinder innovation, exacerbate market inefficiencies, and weaken the U.S. competitive position on the global crypto rails.
Furthermore, the implementation of these rules could impact US crypto users’ interactions with the fast-growing DeFi sector.
A recent report from DeFi Funds shows that many Americans do not trust the traditional financial system.
As a result, they have become curious about the DeFi industry, which they believe offers more benefits over the current system, including control over their funds and lower transaction fees.
Industry response
Given the significant market impact this bill would have on the market, industry stakeholders have started speaking out against it.
Jake Chervinsky, Variant Fund’s chief legal officer, said:
“Many aspects of the bill are fundamentally broken and unworkable. This is not a ‘first offer’ in a negotiation, it is a list of demands that appear designed to kill the bill.”
Chervinsky went on to say that this was an “unprecedented event.” [and] unconstitutional government takeover of an entire industry.” He added:
“It’s not just anti-crypto, it’s anti-innovation and a dangerous precedent for the entire tech sector.”
Zack Shapiro, head of policy at the Bitcoin Policy Institute, echoed this view by pointing out that the draft “extends illegal financial laws to target software and software developers rather than criminal behavior.”
He said this sets a dangerous precedent for censoring legitimate private exchanges, similar to how the government has targeted Tornado Cash and Samourai Wallet developers.
Coinbase CEO Brian Armstrong said the bill would “set innovation back years” and prevent America from being a leader in crypto finance.
He stated:
“We absolutely will not accept this. It is a bad proposal, plain and simple, that would stifle innovation and prevent the US from becoming the crypto capital of the world.”
Uniswap founder Hayden Adams added that the language would “kill DeFi domestically.”
Considering this, he called for “a massive shift from Democratic senators” if progress on market structure reform is to continue.